It is no secret, revenues are down for many municipalities across the country. Declining property values, attributed to the economic downturn over the past few years, have contributed to declining tax revenues. While many municipalities are doing an exceptional job at pairing back their expenses in response to declining revenues, some municipalities are finding it more challenging than others. Municipalities are accountable to numerous people and entities including taxpayers, bondholders, unions, current employees, and retired employees receiving post employment benefits. Given their responsibilities, municipalities have a strong array of options to pair back their expenses, and continue to provide essential services to the people they serve.
Distressed municipalities will often reduce services to provide only essential services to their constituents. At times, however, that is not enough. The largest line item expense for many municipalities is often associated employment related costs for both current and retired employees. An expense reduction measure can be to layoff current employees. Layoffs can be challenging due to minimum requirement levels to provide essential services, collective bargaining agreements, and managing union relationships. Another measure to reduce expenses is to defer pension contributions, or reduce benefits to existing employees, both of which could face collective bargaining agreement challenges. Raising taxes is an option, but tax increases have been difficult to push through. If the aforementioned options fail, municipalities tend to delay vendor payments, or delay routine infrastructure maintenance spending.
More recently, different innovative options have presented themselves. Municipalities can hire experts in financial consulting or legal counseling to help consult on various options. Some municipalities have sought state and federal support, particularly in cases involving natural disasters. Municipalities have sought to issue additional debt and revenue anticipation notes, though raising funds through the capital markets can be challenging for a distressed debt issuer. Therefore, some municipalities have sought alternative financing through banks and hedge funds at less favorable rates. Asset monetization has also been utilized to raise funds.
When all else fails, municipalities have the option of filing for Chapter 9 Bankruptcy, which provides protection from creditors while the given municipality adjusts its obligations. To be eligible for Chapter 9, the entity must be a political subdivision, or public agency instrumentally of a state, who is an authorized debtor, must be insolvent, and must desire to implement a plan to adjust its debts. Under Chapter 9, the municipality works to legally adjust its obligations to be sustainable for the long term. This could impact all parties involved including taxpayers, bondholders, unions, current employees, and retired employees. However, it should be noted that Chapter 9 filings only impacts the specific municipality. For example, when the City of Vallejo, CA filed for Chapter 9, their certificates of participation and appropriation backed debt were adversely impacted, but their general obligation bonds, revenue bonds tied to specific projects, special assessment bonds, and community facilities district bonds were only impacted due to guilt by association. The funds supporting the debt service of those bonds are restricted.
For troubled municipalities that have not successfully paired back their expenses in response to declining revenues, they have very difficult decisions ahead of them. It is never easy to decide where to cut expenses, especially in a time of economic hardship. Taxpayers desire to have essential services provided to them, bondholders want their interest and principal payments when due, employees desire raises for high quality services rendered, vendors want payments for services rendered, retirees want their full pensions, and unions want the best benefits for their members. Municipalities have a plethora of options to satisfy all of their obligations, but it requires all parties involved to negotiate, and to be reasonable. With adequate cooperation, municipalities have a number of options to help to satisfy their obligations.
Investment Information Coordinator
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